Business owners face dilemma in slowdown

It’s no secret the economic downturn that began in late 2007 has affected business owners in many ways. An article, “The Economy Stole My Retirement,” in the Aug. 30 issue of The Wall Street Journal effectively details one of the least understood effects. Millions of independent business owners are delaying retirement because their chief source of retirement funds is the sale value of their business, and that value has declined.

The number of business sales and their value are down substantially. BizBuySell.com, an online small-business marketplace, reports small-business sales in the first half of 2012 are down 40 percent from the first half of 2008. Transaction reporting sources indicate selling prices have also decreased during the downturn. This is primarily because revenue and resulting cash flow and profits are down.

Business owners who decided to wait to sell because sale prices were unacceptably low face yet another problem. They are now five years older. For many, this means decreased energy available to improve the business. In addition, reduced business income may have left them with fewer funds to invest to bring about the turnaround.

What are the options? Being optimists, many owners will opt for rebuilding the business and cashing out later for a higher value. Unfortunately, this is unrealistic for many owners. How long will it take for the turnaround to occur and will the owner actually be able to benefit? Can the owner operate at a high energy level for the five or more years needed to achieve an acceptable value? Can the value even be reached?

Let’s be realistic. There are businesses with continuing cash flow, dominant competitive positions, competent second-line management, and strong fundamentals that will be attractive candidates for acquisition. However, most businesses are not in that position. By definition, most are average. There is nothing wrong with that if the asking price is commensurate with the true value. Realistically priced businesses can be sold.

Those who set their business sale price at the amount they need to retire without regard to actual value are likely to be disappointed.

Those who say they have worked in their business for 20 years and are not about to “give it away” will likely find they will be working in it for another 20 years. The reality is that there are many businesses for sale. Competition is not just from businesses in your area but from across the nation.

If a candid review of your situation reveals you cannot or will not have the time, energy and money to build your business to the level needed to fund your desired retirement, what can you do? Perhaps the starting point is to reduce your income needs. Most of us can comfortably get by with less income.

This may be the time to talk candidly with your financial adviser about your plans and options. If you are working in your business at age 70 because you want to, that’s great. If it’s because you have to, that’s sad. You decide.